At a time when many stock markets in the developed world appear fully valued, minimising losses is arguably more important for long-term investors than maximising gains. That’s not to say there aren’t attractive investment ideas on offer, but it does mean that investors must be even more vigilant than usual when assessing the risk-reward proposition in individual shares.

The classic textbook view of risk and return suggests a strong positive relationship between the amount of risk investors take and the returns they can expect. But, it is easy to forget that there is a wide range of outcomes. When you take risk on a given investment you may be handsomely rewarded - or you may end up nursing a heavy loss.

In today’s market environment, Orbis believes central banks’ efforts to depress the ‘risk-free rate of return’ have deliberately changed the risk-reward relationship, such that expected returns are lower at every level of risk. Chasing the same level of returns, investors have herded into riskier assets, causing asset prices to rise all along the risk spectrum - a boon to investors over the last few years. But with higher prices come lower subsequent returns, leaving today’s investors facing a tough choice. They can either take on more risk in pursuit of the returns to which they have become accustomed, or they can reduce risk and settle for lower returns. Neither choice - lower returns or higher risk - is particularly appealing. A popular response to this dilemma has been to load up on stocks that are considered ‘stable’ or ‘defensive’, including shares of companies that make food, beverages and household staples. It is understandable that investors fearing bloated risk levels would seek the apparent safety of these investments, but by flocking to the same areas of the market and pushing valuations up to potentially dangerous levels, defensive investors may end up being their own worst enemies.

Orbis believes the best way to preserve purchasing power is to focus on buying assets that are trading well below what they are worth, and the best way to destroy it is to pay more for an asset than it is worth. Sberbank of Russia is a good example of Orbis’ emphasis on looking beyond the shortterm risk of volatility in seeking to protect and enhance capital for the long term. When Orbis first invested in Sberbank two years ago, pessimism about Russia was unusually high, allowing investors to buy a dominant banking franchise at a very compelling discount to its intrinsic value on an absolute basis and relative to its banking peers elsewhere in the world.

Sberbank’s initial underperformance was a tough pill to swallow. The combination of sanctions and the collapse in oil prices caused the stock to drag meaningfully on the Global Equity Fund’s performance in 2014. But since then, Sberbank has made a positive contribution to performance over the fullness of Orbis’ holding period and Orbis believes its shares continue to look attractive. In addition to a recovery in the bank’s profitability, Sberbank’s shares may continue to benefit from one or more of the following: a rebound in Russian economic growth, a reduction in Russian interest rates, higher oil prices and a stronger rouble.

Of course, it is nearly impossible to predict when - or if - these things will happen, but the banking industry is ultimately cyclical, as is emerging market investor sentiment. No doubt there will come a day when Russian shares are once again popular with investors. For now, that day looks a long way off, but in the meantime, Orbis believes Sberbank can continue to deliver strong shareholder returns that can compound for many years to come.

There have been no material changes to the Fund’s geographical exposure or currency exposure in the last quarter. With regard to individual holdings, JD.com, China’s second-largest e-commerce player, and KB Financial, Korea’s largest retail bank, entered the top ten off strong outperformance over the quarter. They replaced Rolls-Royce Holdings, the UK-based manufacturer of aircraft engines and power systems, and Barrick Gold, a Canadian gold producer. The position in Barrick Gold has been meaningfully reduced following its strong performance over the first half of 2016.

Adapted from Orbis commentaries contributed by Ben Preston and Maurits Ovaa

For the full commentary please see www.orbisfunds.com

Contrarian investors seek to look at the world from different vantage points in the hope of finding the value that others miss. This requires not only stepping back to see the broader picture, but also conducting extensive in-depth research to build the conviction necessary to take a differentiated view. The Global Equity Fund’s investment in US-based XPO Logistics, one of the world’s largest transportation and logistics providers, exemplifies this approach.

XPO’s shares have lagged the FTSE World Index by more than 40% over the past year and approximately 15% of its shares are sold short, yet Orbis sees tremendous long-term value in XPO.

The company was built by Brad Jacobs, a highly successful serial entrepreneur who has an impressive track record across multiple industries, and now serves as XPO’s chairman and chief executive. Since initially funding XPO with a sizeable US$75 million investment of his own capital in 2011, Jacobs has not sold a single share, and today he owns approximately 16% of the company, which handles about 150 000 shipments daily in more than 30 countries.

Importantly, Orbis’ confidence rests not just on the results that Jacobs has delivered, but also on his decision-making process. Over the nearly four years since Orbis analysts began following XPO, they have had the opportunity to meet frequently with Jacobs and his senior management team, and have gained confidence in his ability to attract and retain top-notch executives throughout the organisation and its operating businesses. That view has also been independently corroborated through extensive reference checks and in-depth discussions with XPO’s customers and competitors.

XPO’s detractors argue that the company’s ‘roll-up’ strategy - growth through acquisitions in the fragmented transportation and logistics industry - has a low probability of long-term success, as roll-ups are often only one bad deal away from disaster. The company’s surprise 2015 acquisition of Con-way, a much-maligned trucking company, seemed to fit that pattern, as it not only dramatically increased XPO’s debt load, but also suggested a drift from its stated focus on high-return, asset-light businesses toward a lower return, asset-intensive model.

However, Orbis views the acquisition as a shrewd financial and strategic move that will create significant value for shareholders and position the company favourably for long-term trends within the industry. Strategically, Orbis believes the addition of transportation assets - having its own trucks rather than just being a broker - makes the company’s other businesses more valuable, not less, as the market’s response implies.

To be fair, XPO has yet to generate free cash flow as it has gone through a meaningful consolidation phase, with sizeable investments in technology (over US$400 million per year). Yet this is consistent with Orbis’ expectations of an eventual positive inflection in free cash flow as the consolidation and investment phase normalises, synergies are realised, and the business continues to grow, all while interest costs decline and capital expenditure spending remains essentially flat.

Of course, others may never come to share contrarian views, but XPO’s shares are concentrated in a very limited number of hands. Eighteen percent of diluted shares outstanding are held by senior management, 17% are owned by Orbis on behalf of its clients, and five other long-term investors account for 30% collectively.

In summary, XPO is a company whose value is difficult to see without careful analysis, a longer-term perspective and a willingness to defy conventional wisdom. By examining the company through our shared fundamental, long-term, contrarian lens, Orbis believes there is value that others have missed.

There have been no material changes to the Fund’s geographical exposures or currency exposures in the last quarter. Regarding individual holdings, Rolls-Royce Holdings, the UK-based manufacturer of aircraft engines and power systems, and Barrick Gold, a Canadian gold producer, entered the top ten, replacing JD.com, China’s second-largest e-commerce player, and Time Warner Cable, the second-largest US cable operator. Orbis incrementally increased its position size in Rolls Royce as its conviction in these shares has strengthened, and sold down the position in Time Warner following strong outperformance. By contrast, share price movements largely accounted for JD exiting the top ten and Barrick Gold entering.

Adapted from Orbis commentary contributed by Adam Karr and Matthew Adams.
For the full commentary please see www.orbisfunds.com

Many think of investing as the pursuit of winning investments. Orbis prefers to think of it as controlled aggression: acting with conviction while trying to avoid big mistakes, much as Charles Ellis explained more than 40 years ago in a Financial Analysts' Journal article entitled 'The Loser's Game'. He cited the work of an engineer who examined amateur tennis and found that about 80% of points are decided by mistakes rather than skilled shot-making. As a result, a player's best strategy is not to try to win by hitting winners, but instead to avoid mistakes and let their opponents lose by making more of them. The ability to avoid losers is particularly important when investors seek to produce positive inflation-adjusted returns amid high starting valuations, as Orbis is seeing globally today.

In recent years, as some sectors of the market have trended higher and higher, Orbis' efforts to avoid making mistakes have created a meaningful drag on performance. For example, companies with stable earnings in developed markets are at a relative valuation peak, and not owning them in bulk has been costly. Orbis is more enthusiastic about the ability to outperform in the future as a result of the larger-than-normal disparity in valuations within global stock markets. Put another way, it seems the reward for skillfully avoiding losers has increased as valuation dispersions have widened.

On very rare occasions the market allows investors to play both a 'loser's game' and a 'winner's game' at the same time, presenting extraordinary opportunity. The best example of this in Orbis' history was in the year 2000 at the peak of the technology (TMT) boom, when it could both avoid the mistake of owning technology shares with extraordinarily high valuations and low prospective returns and invest very heavily in shares of excellent businesses with extremely compelling prospective returns and very little risk of permanent capital loss. The results produced were extraordinary, though not before Orbis looked foolish for a painfully long period of time leading up to that peak in 2000.

Today, Orbis finds itself in a similarly uncomfortable position of looking foolish as a result of not owning an increasingly narrow group of market leaders. But unlike the late 1990s, Orbis does not see the opportunity to invest in a group of attractive laggards with high prospective returns and low risk of permanent capital loss.

While some areas of the market such as precious metals, energy and other commodity-related shares have indeed fallen sharply and are then more likely than not to produce attractive returns, Orbis believes the risk of a permanent loss of capital in those shares is also meaningful, even at today's valuations. Commodity shares' intrinsic value is ultimately determined by a single variable-the commodity price-that is outside the control of management and inherently unpredictable. As a result, Orbis believes its aggregate position size should be constrained within the portfolio.

Playing aggressively for winners today would involve taking much larger positions in the commodity/energy areas of the market. For some, that may appear to be most lucrative thing to do, but at Allan Gray and Orbis, we see ourselves as long-term stewards of your capital and, as such, we prefer to continue to focus on avoiding losers. While the opportunity set today is not as extreme as it was in the TMT era, the rewards available for simply avoiding losers appear to be well above average, and that is a distinct and refreshing change from the situation over the past five years.

Over the last quarter, the Fund's exposure to the euro has increased slightly, while its exposure to the US dollar decreased, as Orbis believes the euro's recent weakness has made it a more attractive store of long-term purchasing power, while the dollar's strength has left it appearing fully valued. There have been no material changes to the Fund's geographical exposures or to its individual holdings, with the top-10 holdings unchanged in the quarter.

The Orbis Global Equity Fund's performance over the past year has been disappointing. However, at times like these, it is important to remember that performance does not come in a straight line - at the portfolio or individual stock level.

Consider the Chinese online gaming company NetEase. Since Orbis first invested in NetEase, in August 2008, the company's market value has increased over seven-fold, and its shares have outperformed the MSCI World Index by over 200%. Yet the long-term snapshot misses the bumps along the way; from Orbis' initial purchase through to early 2013 - a period of more than four years - NetEase underperformed the World Index.

As NetEase's mobile initiative has proved its strength, Orbis' assessment of the company's intrinsic value has increased and Orbis remains confident that its shares have not yet reached their long-term return potential. Orbis believes NetEase's industry-leading research and development capability will help it to deliver nearly 20% per annum earnings growth and it should also continue to benefit from the tailwind of greater internet penetration in China, which remains low relative to developed markets.

Another beneficiary of that trend is JD.com, the second largest e-commerce player in China, and a new investment in the second half of 2015. Trading at less than 0.5 times gross merchandise value, JD's valuation is well below levels that have proven to be extraordinary buying opportunities for other rapidly growing retailers in the past, such as Amazon and Walmart.

NetEase and JD are two examples of the many compelling long-term investment opportunities Orbis has identified in emerging markets. The gap between valuations in developed and emerging markets is now near its widest level in over 10 years. Historically, this could have been justified by similarly wide differences in fundamentals, but today there is little difference in the returns on equity between the two groups.

On the other hand, while developed market shares broadly trade at elevated valuations, following a six-year equity rally, Orbis has still managed to identify shares in these markets that it believes are capable of delivering superior long-term returns. Examples include Qualcomm and Motorola Solutions, the Fund's two largest US holdings.

Qualcomm produces chips for use in smartphones. With net cash holdings worth more than 25% of its market value and profit margins at stable, historical norms, its sizeable valuation discount relative to the S&P 500 Index appears unwarranted. Orbis believes Qualcomm will maintain revenue growth of over 10% per annum as smartphones become increasingly ubiquitous.

Similarly, Motorola Solutions, the leading provider of communications systems for law enforcement and emergency responders globally, is available at a discount to the market despite its strong competitive position and a cash-pile amounting to over 30% of its market capitalisation.

The Fund's low turnover in 2015 is a testament to Orbis retaining conviction in a large number of performance laggards. With highly concentrated portfolios, Orbis pursues only high-conviction investment ideas. Thus, for each laggard it elects to retain, it remains confident that the market will eventually reward its patience.

Over the last quarter, there have been no material changes to the Fund's exposure to different regions or currencies. With regards to individual holdings, US-based XPO Logistics, a logistics and transportation services provider, entered the top 10 holdings. Orbis initiated a position in XPO in the third quarter and incrementally purchased more shares as its conviction strengthened. Sberbank of Russia re-entered the top 10 holdings, on account of its strong outperformance.